Contribution of foreign trade to economic development


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.

Foreign trade has worked as an ‘engine of growth’ in the past. Recently the “outward-oriented growth strategy” adopted by the Newly Industrializing Economies of Asia, has enabled many countries to overcome the constraints of small resource-poor under-developed economies. Foreign trade contributes to economic development in a number of ways as follows.
 
i) It explores means of procuring imports of capital goods, which initiates the development process.
 
ii) It provides for flow of technology, it allows an increase in factor productivity.
 
iii) It generates pressure for dynamic change through (i) competitive pressure from imports, (ii) pressure of competition for export markets, and
 
(iii) a better allocation of resources.
 
iv) Exports allow fuller utilization of capacity, increased exploitation of economies of scale, separation of production patterns from domestic demand, and increasing familiarity with absorption of new technologies. These, in turn, help increase the profitability of the domestic business without any corresponding increases in price.
 
 v) Foreign trade increases worker’s welfare. It does so at least in four ways:
(i) larger exports translate into higher wages;
 (ii) because workers are also consumers, trade brings them immediate gains through cheaper imports;
(iii) It enables most workers to become more productive as the goods they produce increase in value;
(iv) trade increases technology transfers from industrial nations to UDCs and the transferred technology is biased in favour of skilled labour;
vi) Increased openness to trade has been strongly associated with the reduction of poverty in most developing countries.
 
In the twenty-first century, we can easily identify the conditions that are favourable for developing economies to the conditions to employ foreign trade as a factor in economic growth. They are as follows:
 
i) Increasing spread to globalization translates into larger movement of goods and services across the nations.
ii) Continuing reallocation of manufacturing activities from industrial economies to developing economies offers ample opportunities to expand trade not only in goods, but also in services, which are becoming increasingly tradable.
iii) Trade is intertwined with another element of globalization: the spread of international production networks.
iv) Growth of trade is firmly buttressed by international institutions of long standing. The WTO, built on the legacy of the GATT, aims to create a commercial environment more conducive to the multilateral exchange of goods and services.
v) In recent years there have been substantial reductions in trade policy and other barriers inhibiting developing country participation in world trade. Lower barriers have contributed to a dramatic shift in the pattern of developing country trade-away from dependence on commodity exports to much greater reliance on manufactures and services. In addition, exports to other developing countries have become much more important.


Friday, 18th Mar 2016, 10:23:55 AM

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